Q&A: How Repo Powers Global Fixed Income Markets

Résumé détaillé

Collateral – and specifically the repo market – touches virtually every corner of global finance. It underpins bond pricing across the board, from government and corporate bonds…

Collateral – and specifically the repo market – touches virtually every corner of global finance. It underpins bond pricing across the board, from government and corporate bonds to mortgage-backed securities (MBS) and emerging markets (EM), and is ultimately a tool that helps banks manage funding costs and regulatory capital usage. It determines leverage availability for hedge funds and influences rates for asset managers and pension funds. Yet many participants have historically lacked a deep understanding of its position in the market.

As the market becomes more informed, the importance of collateral, repo and securities lending is increasingly in the spotlight. The advances in technology have not only provided sophisticated execution methods and eased operational risk, but also increased interest, understanding and appreciation of the significant role repo plays in the wider market.

At its core, a repurchase agreement (repo) is a short-term, collateralized loan: one party sells a security with an agreement to repurchase it at a slightly higher price at a later date. The difference in price represents the interest, or repo rate. The repo market, now standing at an estimated $12.6 trillion in daily U.S. exposures and €13.65 trillion outstanding in Europe, is increasingly moving from back-office utility to strategic center of price discovery, helping underpin the movement of collateral and margin across the financial system.

In a recent conversation with OpenMarkets, Sara Carter, Head of BrokerTec EU, at CME Group, explains what this market is, who it reaches and why now is the moment to pay attention.

At a high level, who is impacted by repo market activity? Why is this market so important to understand?

At its core, the repo market is a tool in which the financial system moves collateral. Its reach and usage is far wider than most participants appreciate.

Think of this market concept like renting a car instead of buying one.

Début de l'article, extrait de Institutional Investor. Pour lire la suite, ouvrez l'article chez le média.